Tuesday, March 4, 2014

In
its recent decision in Lennar Mare Island
v. Steadfast Ins. Co., 2014 U.S. Dist. LEXIS 26405 (E.D. Cal. Feb. 28,
2014), the United States District Court for the Eastern District of California
had occasion to consider the relationship between a fixed site pollution
liability policy and a remediation cost containment policy.

The Lennar decision concerns environmental
liabilities at a former Naval base on Mare Island in Vallejo, California.The site was transferred to the City of
Vallejo in 2002.The City agreed to
undertake an environmental remediation of the site that would be funded by the
Navy.The City later transferred the
property to Lennar Mare Island, LLC (“LMI”).LMI, in turn, contracted with CH2M Hill Constructors, Inc. (“CCI”) to
perform the required environmental remediation.

Steadfast
Insurance Company issued two policies relevant to the site.First, it issued a Remediation Stop Loss
policy to CCI (the “RSL Policy”), providing cost overrun protection with
respect to CCI’s remediation efforts.Second, Steadfast issued an Environmental Liability Insurance policy
(the “ELI Policy”) to LMI that insured against cleanup costs resulting from a
pollution condition not known to LMI prior to the policy period, but instead
first discovered during the policy period.

The
Steadfast policies referenced each other in an effort to ensure that they did
not provide overlapping coverage.Thus,
the ELI Policy defined “Known Pollution Conditions” as:

… all conditions specifically described in the Scope of Work
Endorsement to the Remediation Stop Loss Policy . . . and which require ormay ultimately require any form of remedial
investigation or action . . .

The
Scope of Work Endorsement in the RSL Policy, in turn, made reference to the
conditions and activities specifically outlined in that policy and certain
attachments thereto.The RSL Policy also
contained the term Known Pollution Conditions, which it defined as being
limited to the conditions described in the Scope of Work Endorsement requiring
any form of remedial investigation or action.

At
issue in the Lennar decision was LMI’s
right to insurance coverage for PCB contamination in Building 116 of the
site.The RSL Policy’s Scope of Work
Endorsement, and certain attachments thereto, made reference to PCB
contamination in concrete floor slabs in Building 116.The endorsement also referred to PCB
contamination in transformer pads in Building 116.The RSL Policy did not, however, make
reference to PCB contamination in the wood floor of Building 116.Thus, when CCI encountered PCB contamination
in the building’s wood floor during the policy period, a question was raised as
to whether LMI was entitled to remediation cost coverage for this contamination
under the ELI Policy.

LMI
filed a declaratory judgment action and promptly moved for summary
judgment.Steadfast stated in opposition
to the motion that it had obtained several documents suggesting that LMI and/or
CCI was aware of the PCB contamination in the wood floor prior to the inception
date of the ELI Policy, and thus it may be a Known Pollution Condition for
which coverage was unavailable.Steadfast argued, therefore, that at a minimum, it should be entitled to
further discovery on the issue.Steadfast,
in fact, had been pursuing such additional discovery but was mired in several
non-party discovery disputes at the time LMI filed for summary judgment.LMI countered that any such discovery was
irrelevant, since the ELI Policy defined the term Known Pollution Conditions as
anything identified in the RSL Policy’s Scope of Work Endorsement, and that as
such, anything not identified in the Scope of Work Endorsement was not a Known
Pollution Condition.In other words,
because the Scope of Work Endorsement did not specifically identify PCB
contamination in the wood floor of Building 116, it necessarily followed that
this could not be a Known Pollution Condition for the purpose of the ELI
Policy, regardless of when LMI first became aware of or discovered this
condition.

The
court disagreed with LMI’s reading of the two policies.While the RSL Policy stated that only those
conditions specifically identified could be considered Known Pollution
Conditions for the purpose of the RSL Policy, the definition of Known Pollution
Conditions in the ELI Policy contained no similar restriction.In other words, an area of contamination
could be considered a Known Pollution Condition for the purpose of the ELI
Policy even if not specifically identified in the RSL Policy’s Scope of
Work.In any event, the ELI Policy’s insuring
agreement made clear that coverage was unavailable for any pollution condition
discovered outside of the policy period.The court reasoned that LMI’s interpretation of the ELI Policy “that
anything not listed as a known condition in the RSL Policy necessarily was
discovered during the policy period – would collapse the two provisions of the
ELI Policy [i.e., the discovery requirement and the known conditions
prohibition] into one.”Thus, the court
denied LMI’s motion for summary judgment without prejudice, and permitted
Steadfast additional time to take discovery into the known conditions issue.

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